Nov. 1 (Bloomberg) -- Chances are good that the power of
the U.S. government, squarely in the hands of Democrats the past
two years, is about to become divided between the two parties.
Modern American history suggests that this is the best of all
worlds. With all respect to Abraham Lincoln, a house divided
against itself often prospers.

Since 1970, the levers of federal government -- the White
House, Senate and House of Representatives -- have been in the
hands of one party, whether Republican or Democrat, 30 percent
of the time. By most any measure, the U.S. economy has been
healthier the other 70 percent of the time.

First let’s look at gross domestic product.

From 1970, median U.S. GDP has grown 3.3 percent in years
of divided government (1970-1976, 1981-1992, 1995-2002, 2007-2008), compared with 3 percent when government was unified
(1977-1980, 1993-1994, 2003-2006, 2009-2010).

The effect has been more pronounced in recent years. Since
1981, when Ronald Reagan took office, median U.S. GDP has grown
3.3 percent in years in which the government was divided and 2.8
percent when government was unified. Since 1993, when Bill
Clinton took office, the economy has grown 3.6 percent per year
when power is split and 2.8 percent in the other times.

How about unemployment? Divided government might be exactly
what today’s jobless should be wishing for.

Since 1970, median unemployment has been 6.1 percent under
one-party rule, 5.7 percent when both parties have some control.
The spread narrows (6 percent vs. 5.8 percent) since 1981 and
widens (6 percent vs. 4.9 percent) since 1993.

Stocks Cheer

Equity markets have practically jumped for joy at political
division. Since 1970, the Standard & Poor’s 500 Index has
increased at a median rate of 13.5 percent per year in divided
times and 9 percent per year under one-party rule. That spread
grew (14.6 percent vs. 9 percent) since 1981 and even more so
since 1993 (19.5 percent vs. 9 percent).

I can think of two plausible explanations for the improved
performance of our economy when the federal government is
divided.

Under the “politicians are idiots” view, divided
governments tend to be gridlocked, and gridlock -- with
apologies to Gordon Gekko -- is good. A paralyzed government is
a boon to the economy because the changes that politicians
contrive tend to be harmful.

Under the “politicians are sensible” view, divided
governments produce better lawmaking because only sensible
policies can achieve the necessary bipartisan support. When
government is controlled by one party, common sense is cast
aside as those in power use their muscle to reward friends and
punish enemies.

Testing Gridlock

One crude way to cast light on the relative merits of the
two views is to test the gridlock theory directly. Does
legislative activity tend to grind to a halt when government is
divided?

One imperfect measurement, tallying the number of bills
passed by Congress and signed by the president, counters the
notion that government is paralyzed when divided.

Since 1993, divided governments have passed a median of 241
bills into law each year, while unified governments have passed
210. A similar pattern holds if we expand the sample back to
1970.

This is, of course, not decisive evidence, because the
number of passed bills is irrelevant if the legislation is
meaningless. (Anybody want to name a post office?) Anecdotally,
though, some of the great moments in modern legislation, such as
the Tax Reform Act of 1986 and the Personal Responsibility and
Work Opportunity Act of 1996, also known as welfare reform, were
passed when each party enjoyed some control in Washington.

Impact on Deficit

There is also some evidence that divided governments have
been more fiscally responsible, especially recently. The median
federal budget deficit as a percentage of GDP has been 2.7
percent since 1970 under both formats of government, slightly
lower (3.1 percent vs. 3.4 percent) in divided times since 1981
and even better (1.2 percent vs. 3.4 percent) in divided times
since 1993.

That last part shows that the showdown between President
Clinton and House Speaker Newt Gingrich offered more than good
political theater; it produced some results.

It’s not hard to see how political alignment might
influence our leaders’ virtue on deficits: Republicans are
attracted to deficit reduction because it constrains the big-government tendencies of Democrats, while Democrats are
attracted to it because it constrains the tax-cutting tendencies
of Republicans.

Deficit reduction is tough work. It shows that divided
government can’t easily be written off as inevitable gridlock.

As President Barack Obama and his team look ahead to the
prospect of governing in collaboration with Republicans, they
should look at history, and they should take heart. They can
still think big, so long as they think sensibly.

(Kevin Hassett, director of economic-policy studies at the
American Enterprise Institute, is a Bloomberg News columnist. He
was an adviser to Republican Senator John McCain in the 2008
presidential election. The opinions expressed are his own.)